Bertelsmann, the German media group, has launched a new music publishing venture with Kohlberg Kravis Roberts to acquire catalogues of songs with about €250m ($348m) of financing from the US private equity group.
The venture marks a strategic departure for KKR, which completed some of the world’s biggest leveraged buy-outs during the debt bubble, but is now looking for new ways to do deals after bank loans dried up.
For Bertelsmann, the deal allows it to rebuild its music publishing activity, after selling most of its catalogue to Universal Music in 2006, without having to finance the expansion from its already stretched balance sheet.
It also provides the German group with a means to invest in a faster-growing area than its other traditional businesses such as its Random House books division or magazine subsidiary Gruner+Jahr.
The venture will be formed by Bertelsmann spinning out BMG Rights Management, a collection of songs by about 300 artists mostly left over from the sale of the German group’s share of its music joint venture with Sony last year.
It owns songs by Kylie Minogue, Nena, Roy Orbison, Mecano and The Beautiful South. When the new venture completes its first acquisition, which is expected by the end of the year, KKR would inject €250m of equity in return for a 51 per cent stake.
”This is an innovative type of private equity, it is a build-up, together with a large corporate, a more entrepreneurial type of deal, about backing a good management team,” said Philipp Freise, a KKR director responsible for media deals.
Several large music catalogues could soon be put up for sale. ABKCO Music & Records, which owns songs by the Rolling Stones, the Animals, and the Kinks, could be put on the block after its owner Allen Klein died last weekend.
There is also speculation about the future of Michael Jackson’s share of Sony ATV, which owns more than 250 Beatles songs, and the Mijac catalogue, which includes the singer’s own rights, after he died last month leaving heavy debts.
Hartwig Masuch, chief executive of BMG Rights Management, said: “This is a very fragmented market, with many small companies, so you don’t necessarily have to target the biggest catalogues.”
Music publishing’s relatively steady cashflow, which continues to grow even as recorded music sales are eroded by internet piracy, has attracted several private equity groups, and underpinned the buy-outs of both Warner Music and EMI.
A bigger prize would be EMI Music Publishing, but Terra Firma, the private equity group that bought EMI in 2007, would be reluctant to part with its most prized asset.
Valuations of catalogues, can vary widely, with multiples of net publishers’ share – the measure of income in the publishing business – dictated by the quality of the catalogue and the number of years left until its rights expire.
The new venture brings together two competitors from television broadcasting, as KKR owns a stake in ProSiebenSat.1 and Bertelsmann owns RTL.
But KKR has shown interest in Bertelsmann’s music business in the past, teaming up unsuccessfully with EMI to bid for BMG Music Publishing when it was sold in 2006. Now Bertelsmann is short of cash, KKR has swooped again.
Hartmut Ostrowski, its chief executive, has stated that Bertelsmann has limited capacity for acquisitions, having ended last year with €6.6bn in debt, just above its leverage ceiling of three times earnings.
